The Islamic Development Bank funds economic development projects in Islamic countries. It′s required to provide interest-free loans and participate in the equity capital of the venture it supports. This institution is also charged with responsibility for assisting in the promotion of foreign trade amongst member countries, especially in capital goods. It provides technical assistance, and extends training facilities for personnel engaged in development activities and undertakes research for enabling economic, financial and banking activities in Muslim countries to conform to the Sharia.
Leasing is of a growing significance for the Islamic Development Bank, and the institution is unique amongst the Middle Eastern development assistance agencies in providing this type of support. Under this method of finance, the bank purchases a particular piece of equipment on behalf of the company it is helping, and the company then pays the bank rent for use of the equipment. As the leasing contracts are for long periods, usually seven to ten years, with the terms fixed in advance according to Sharia principles, there is complete certainty for all parties to the agreement, unlike many commercial rental contracts.
Saudi Arabia’s main contribution to Islamic banking has been to provide the largest equity share in the Islamic development Bank and to act as host nation to this Muslim institution. This Jeddah-based organization, founded in 1975, is essentially a development assistance agency and plays little part in the Saudi Arabian domestic economy apart from providing some employment. Few of its staff are Saudi citizens, however, as most are specialists in various financial fields drawn from the 38 participating states of the Islamic conference which finances the bank. The purpose of the bank is to promote economic advance and social progress in its member states, but its assistance is given in accordance with the principles of the Sharia.
Its early investments were varied, including a poultry project in North Yemen, a cement plant in the United Arab Emirates, a textile company in Pakistan and an iron ore extraction project in Mauritania.
Mode of Finance
The Islamic Development Bank is financed by the Islamic Conference Organization (ICO) and the states that participate in it.
The Islamic Development Bank under its charter has to satisfy itself that any project in which it takes an equity stake is well managed, but it is not allowed to take a majority or controlling interest, except where it is necessary in order to protect the bank’s investment. The bank can also sell off its investment when it is appropriate to do so, and the objective in any case is not to provide permanent equity participation, but to provide start-up assistance of a transitory type, although the period of involvement may last a decade or more, given the teething problems infant industries often have in developing countries. Although the Islamic Development Bank in accordance with the sharia law shares in both the profits and the losses of the companies in which it invests.
Under its charter the Islamic Development Bank does not provide loans to an enterprise in whose equity it has participated except in special cases approved by not less than two-thirds of the total voting of the members. Profit sharing is where the bank provides a loan, but instead of charging interest, as is the practice with non-Islamic banks, or levying a fixed service charge, as the bank usually does as an Islamic institution, it receives a share in the future profits of the enterprise being financed.
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